June – 2014

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What We Have Learned About Collecting Rental Debt
Politicians Decide That Landlords Need To Be Government Agents
The Eviction Educator

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Volume 15• Issue 6 June 2014 Landlord News 3600 South Yosemite Street Suite 828, Denver, Colorado 80237 thsnews@thslawfirm.com www.thslawfirm.com Denver Phone 303.766.8004 FAX Completed Eviction Forms To: 303.766.1181 or 303.766.1819 Colorado Springs Phone 719.550.8004 FAX Completed Eviction Forms To: 719.227.1181 WHAT WE HAVE LEARNED ABOUT COLLECTING RENTAL DEBT We are involved in collecting rental debt for all types of clients. From national managers and owners to single owners. For a long time we weren’t involved. After a not so great association with a collection agency client, back in the 1990s, we made a conscious decision to get out of debt collection. However, based on client need and demand, we started providing debt recovery services about five years ago. As a landlord law firm, even when we weren’t actively involved in debt recovery, we constantly dealt with collection-related issues and collection agencies. Going full circle over the years, we have heard a lot about collections from clients, and like to think we have learned a thing or two as well. This month we share our experience. Before discussing our experience, a brief recap of the collection industry is necessary. Collection of rental debt is handled almost exclusively by collection agencies (agency or agencies). Collection agency efforts to recover debt are almost always limited to calls, letters, and credit reporting, and do not include bringing lawsuits. Because they don’t take the next step that could be taken to collect, when a debtor won’t pay, most agencies are known as “front-end agencies”. If the debtor is resistant and refuses to pay or cuts off telephone communication by exercising their rights, front-end agencies abandon any further efforts, but may place the debt on a tenant’s credit report. Agencies report rent debt to credit agencies hoping that the tenant will actually care about their credit enough someday to pay the debt. Almost, without exception, all rental debt is collected on contingency. You pay nothing if no money is collected. If an agency is successful in collecting money, the agency’s fee is a percentage of the amount collected. continued on page 2 POLITICIANS DECIDE THAT LANDLORDS NEED TO BE GOVERNMENT AGENTS This is a cautionary tale that underscores why multi-family housing providers have to be both involved and vigilant when it comes to political issues. not staying informed can have unhappy consequences! Has the time arrived when politicians and government can force private citizens to act as government agents? Apparently the Westminster city council thought so with its recent vote to require “owners of licensed rental properties provide to each new tenant a Colorado Voter Registration form, as approved by the Colorado Secretary of State, concurrent with the landlord’s delivery of possession of the premises to the tenant.” This proposed ordinance also included the power to levy fines of up to $1,000 on landlords who fail to comply. Landlords have a right to conduct their business without politicians threatening to fine them if they do not correctly process government paperwork for government purposes that are totally unrelated to the business of renting properties. Based on the proposition that “renters are less likely to register to vote or participate in elections than homeowners”, these elected officials believe it is government’s responsibility to do whatever is necessary to register more people. Proponents of this type of government intrusion into the private sector believe it is their moral obligation to make sure that governmental agencies assure that individuals are required to conform to regulations continued on page 2 WHAT WE HAVE LEARNED ABOUT COLLECTING RENTAL DEBT continued from page 1 Industry contingency percentages range from 20% to 60%. Probably the biggest fallacy about collecting rental debt is that the collection rate or contingency percentage is the most import factor in negotiating a collection contract. Invariably, the collection rate is almost the first issue people want to discuss. Low rates sound good, but when we ask clients how the agency at twenty percent is doing (meaning the client gets 80% of what is collected), the answer always is “not good”. Eighty percent of not much is still not much. The most important factor in collections is the liquidation rate. The liquidation rate is a percentage determined by dividing the total amount collected by the total amount placed for collection. If you place a $100,000 for collection, and $15,000 is collected, then the liquidation rate is fifteen percent. In collections, the most important question is not what your rate is, but what you are receiving (netting back)? Your ultimate net back is directly tied to the liquidation rate. Why the liquidation rate is more important than the collection rate is easily illustrated. Assume $100,000 is placed for collection. If your rate is 20%, but an agency only collects 5%, then you receive $4000 (80% of $5,000). If your fee is 50% or 2.5x higher than that low-low rate, but 15% is collected, you receive $7500 (50% of $15,000). Collections are like anything else in life. You get what you pay for. If an agency has two piles of debt, one that they get paid 20% on, and one that they get paid 40% or 50%, which pile of debt do you think will get the most effort? Liquidation rates are driven by work efforts, treatments, and collection strategies. You’ll never receive, from front-end collection efforts alone, as much as you can by deploying front-end agency efforts, multiple treatments, and legal efforts. However, hardly any agencies deploy legal efforts, and the ones that do deploy legal efforts don’t do it on a significant basis. Nobody is going to go the legal route on your debt if you’re paying them twenty or thirty percent. Multiple treatments of debt means using multiple collection agencies and incorporating a legal strategy. Thus, by definition, a single collection agency can’t provide multiple treatments. Right behind the collection rate fallacy, is the liquidity myth. Occasionally, we are told that a collection agency is collecting twenty-five percent to forty percent of a client’s debt. However, at the same time, almost everyone else tells us that they are either dissatisfied with their agency’s recovery rate, have no idea of how their continued on page 3 POLITICIANS DECIDE THAT LANDLORDS NEED TO BE GOVERNMENT AGENTS continued from page 1 that they have arbitrarily decided are in the best interest of society. In addition to all of the obvious objections to this type of ordinance there is the distinct possibility that it can and should be challenged as a violation of the 1st Amendment of the Constitution which guarantees all of us the right to speak but also the right to “not” speak. There is case law that supports the right of the individual to “not” speak and requiring a landlord to provide voter registration forms is forcing speech that a landlord may not want to convey. There is also the argument that this type of proposed ordinance would be a violation of state law that prohibits intimidation — C.R.S. § 1-13-713. This ordinance threatens action (fines) against landlords, by requiring them to compel participation in elections (providing them forms). The fact that voter registration in Colorado is both easy and very accessible is something that is not even taken into consideration in this situation, because it would expose the truth that this ordinance is an unnecessary intrusion into the business operation of Westminster landlords and a violation of the rights of rental owners. Every eligible voter can register on line or at any Colorado driver’s license office and it should be their choice to register or not. It is not the place of politicians or governments to require landlords to act as a government agent encouraging new renters to register to vote. It appears that the opposition to this ordinance has been successful this time in blocking its passage and having it indefinitely tabled. The proposal of an ordinance like this is an issue that should be of interest to all landlords not just Westminster. The leading proponent for this ordinance Mayor ProTem Faith Winter has not changed her views on this and has indicated she would like to see a similar type of legislative initiative enacted on a statewide basis. You can expect to see some form of this type of proposal resurrected at the legislature should Westminster Mayor ProTem Faith Winter win her elections to the State Legislature. The industry dodged a bullet at the city level but the only way to avoid having to fight a battle like this before it excalates is to stay informed and active in the political process. Landlord News June 2014 Page 2 A Little Political Humor WHAT WE HAVE LEARNED ABOUT COLLECTING RENTAL DEBT continued from page 2 agency is doing, or both. Because we have never seen any published recovery rates for rental debt, these contradictory positions are difficult to reconcile. However, based on information available to us, our best estimate is that the recovery rate for front-end collection agencies probably ranges from five to twelve percent, with bad agencies ranging at a below five percent and good agencies ranging closer to the high end. Back in 2008, the ACA International, the leading trade association representing credit and collections professionals, reported that just 18% of all money referred to collection agencies is eventually recovered. We have reviewed numerous collection agency reports that show liquidity rates between three and five percent. We have also seen millions of dollars of rental debt sold for four cents on the dollar supporting a four percent liquidation rate. Two common scenarios can lead to mistaken beliefs about liquidation rates. The first scenario is the big check scenario. The community receives big checks monthly or at least what they consider to be significant or satisfactory checks. The second scenario is comparing a single year’s collections to a single year’s write-offs. Under both scenarios, the community may think that an agency is doing fine. However, analyzing your agency’s performance based on your monthly check, or comparing isolated write offs to isolated collections doesn’t accurately calculate recovery or liquidation rates because it doesn’t factor in the total amount of debt placed. Again, the liquidation rate is the total amount collected divided by the total amount placed, not the amount written off last year. If you have given an agency $100K a year for five years, and they collected $25K for you last year, the recovery rate isn’t 25% ($25K collected last year / $100K written off last year), but rather 5% ($25K/$500K). Big checks don’t necessarily mean an agency is doing a good job either. If you give any agency enough volume (place enough debt), you’re going to get a satisfactory check. The real question isn’t the size of your check, but what is the volume placed with the agency to get that check? Calculating true liquidation rates is complicated continued on page 4 1. The Firm Evictions Department operates as a team. Regardless of who you have spoken to previously, anyone who answers the telephone in the Evictions Department is qualified and prepared to answer your questions and respond to case inquiries. 2. If you have already served a 3-day demand, and the new month’s rent becomes due, you do not need to serve a new notice for the new month. If your resident failed to comply with the first demand we can proceed with the eviction case to remove them. Serving a new demand will only delay the case in court. If you have questions, please call us before posting any subsequent notices. 3. The Lease and State Statutes control the landlord’s ability to remove bad tenants. Always review your lease before deciding on the steps that you need to take to address the problem. Poorly worded or incomplete leases can sometimes limit a landlord’s ability to evict. Not all lease provisions are legally enforceable. Call and get your questions answered before starting the eviction process. JJJJJJJJJJJ Landlord News June 2014 Page 3 IMPORTANT THS JUNE DATES JUNE 10th Basic Fair Housing THS Lower Conference Center 3600 S. Yosemite Street Denver, CO 8:30 a.m. – 11:30 a.m. JUNE 12th AASC Awards Dinner Antlers Hilton 4 S. Cascade Avenue Colorado Springs, 80903 5:00 p.m. – 9:00 p.m. JUNE 18th – 21st NAA Conference Colorado Convention Center 700 14th Street Denver, CO 80202 JUNE 26th AAMD June Awards Cielo at Castle Pines 485 W. Happy Canyon Drive Castle Rock, CO 80108 3:30 p.m. – 7:00 p.m. WHAT WE HAVE LEARNED ABOUT COLLECTING RENTAL DEBT continued from page 3 by a variety of other factors. Portfolio liquidation rates can vary significantly depending on the economic demographics of individual communities. Liquidity is also a moving target because the numbers are forever in flux. Every month you may be receiving money, but you are also placing debt with the agency. While you can take liquidity snapshots, true liquidity can only be measured on a single batch of debt. For example, if you placed $30K of debt with an agency, in May two years ago, what percentage of this $30K has been collected? Because it takes the average debtor two years to get on his feet, determining liquidity on a two-year-old batch of debt is probably the most accurate and fairest way to determine liquidation rates, and thus the true performance of any agency. One thing is certain about liquidation rates. You’ll never know your true liquidation rate if you’re not getting enough information from your agency to accurately determine liquidation rates, and if you don’t take the time to really drill into the information. Another collection myth is that credit reporting is the end-all be-all of collecting money. However, credit reporting doesn’t magically result in the collection of rental debt, or significantly impact liquidation rates. If it did collection agencies reporting 100% the debt referred to them would be liquidating at phenomenal rates. While impact on recovery is uncertain, credit reporting does benefit collection agencies. Unfortunately, the possibility of an agency using credit reporting as a substitute for concerted work efforts is significant. After all, if a former tenant won’t pay, after calls and letters from an agency, what else can an agency do but ding the tenant’s credit? Credit reporting allows agencies to place millions or even hundreds of millions of dollars of credit reporting hooks into the water, with little or no effort to man those hooks. The sheer volume of the credit reporting hooks cast into the water substantially benefits the agency. However, since not many of those hooks are yours your benefit is substantially less. Many tenants did not have excellent credit at the time they rented from you. What tenants had at the time of rental was acceptable credit. A person with a high credit score cares about their credit and pays their obligations on time. Many tenants who owe money simply don’t care about their credit. The small fraction of tenants that do care, make arrangements upon move-out. Credit reporting can and has resulted in major lawsuits, some involving awards in the tens of millions of dollars. The reality is that credit reporting is just one tool to collect money; it should be done carefully, and at the right time to avoid significant potential liability, and only after other significant efforts to collect have been made. Credit reporting should never be used as a substitute for continuous work efforts. Hard and consistent work efforts, focused by constant analysis of debt to deploy multiple treatments of debt, including legal treatment, always outperforms front-end credit reporting collection models. When collecting money for smaller or individual owners or managers, we frequently encounter two issues. The first issue is SODA inflation. SODA stands for statement of deposit account, and is otherwise known as a security deposit accounting or a security deposit disposition report. The SODA and good ledger are critical to establish balances in tenant collection cases. Two examples illustrate SODA inflation. One, the tenant leaves the place a mess, and you have to spend thirty hours getting the unit into rental condition. Yes, you may have spent the thirty hours (probably more) getting the place cleaned up, however, no judge is going to award you cleaning charges at $75, or even $50 an hour for cleaning or repairs. Two, the tenant lives in your unit for five years, but you charge the tenant $750 on their SODA to repaint the unit. Almost all judges will hold that repainting costs after five years of occupancy are “normal wear and tear”. If the rent was $1,000 a month, and the tenant owes you two months of rent, a $2400 SODA (2 months of rent, plus reasonable cleaning charges), becomes nearly a $5,000 SODA ($2000 for rent, plus $2000 for cleaning, plus $750 for painting). The second issue, we often see, is unrealistic expectations about collecting the money. Expectations are unrealistic for two reasons. First, as pointed out, even if you won in court (on the example above), most judges are going to award closer to $2,400 rather than the nearly $5,000. Second, just because you’re owed $2,400 on a single-family lease, doesn’t mean the account is worth $2,400. This could also be true for a multifamily unit defaulted lease account. However, volume continued on page 5 Landlord News June 2014 Page 4 WHAT WE HAVE LEARNED ABOUT COLLECTING RENTAL DEBT continued from page 4 makes multi-family collections different from single owner or small portfolio collections. A multi-family apartment community has sufficient write-offs (volume), over time, to establish a realistic liquidation expectation. In other words, if an apartment writes off X over time, then they should receive Y from collections. However, a small owner or portfolio manager doesn’t have the volume to establish an average liquidation rate. If you only have a handful of accounts, you pretty much take your debtors as you find them. The account could be a home run, or a strike out. If the debtor is only marginally collectible, you’re better off accepting this fact and taking what you can get, even though you can’t make it up on other accounts, and you might have to bear the loss directly. Unrealistically holding onto the dream of being made a hundred percent whole with a bad debtor usually results in the zero recovery nightmare. JJJJJJJJJJJ A LOOK BACK AT THE AAMD TRADESHOW The winner of the THS iPad Mini was Kim Sutherlin – Community Manager, Cottonwood Terrace and Tanglewood Apartments (Peak Living). Kim has been in the industry for one year. She started with Alliance and moved to Peak in December, staying on as the manager at Tanglewood and eventually taking over Cottonwood Terrace as well. Her favorite thing about working in the property management industry is providing people with something so vital, a comfortable home. Kim is currently finishing up a doctorate degree, and thinks the iPad Mini will certainly help her with her studies. JJJJJJJJJJJ Landlord News June 2014 Page 5